According to the tax specialists at PwC Hungary, the extent to which the Hungarian government can make the conditions for taking up Hungarian residence attractive is still uncertain.The legislation currently in force and cumbersome procedures do not necessarily make it a tempting option.

In December 2012, the Hungarian government amended the law on the entry and residence of third-country nationals (individuals who are not nationals of the European Economic Area), enabling Hungarian residence to be granted in the special national economic interest along the lines of possibilities offered by a number of other countries. The basic requirement for acquiring the residence permit is that the foreign national must purchase at least EUR 250,000 worth of government bonds specially issued for this purpose, either as a private individual or via a business of which they are a majority shareholder, and must retain them for five years.

The decree of the Ministry for National Economy governing details of issue of the EUR 250,000 government bonds came into force on 20 February, 2013. The government bonds are exclusively put into circulation by the Government Debt Management Agency Private Company Limited by Shares, which will establish contractual relations with enterprises approved by the Parliamentary Committee for Economic Affairs. Such enterprises, which are legal entities not registered in Hungary, will contract in the given third-party country with foreign nationals wishing to acquire Hungarian residence or a business of which the foreign national is a majority shareholder.

It is understandable in light of the current international and Hungarian economic situation that the government is turning to unorthodox solutions to supply the country with credit. However, it is unclear what the thinking is behind the legislature’s intention of the Parliamentary Committee for Economic Affairs contracting with foreign enterprises for the trading of Hungarian government residency bonds. In this form, the interest on the government bonds or any profit will be realized abroad and will be taxable abroad. In our view, it would be difficult to oblige the foreign enterprises, to whom the territorial scope of Hungarian legislation does not apply, to provide data about the number and owners of the issued bonds to the immigration control authority.

“Currently it is not clear how it can be checked that the foreign enterprise is in possession of all licences necessary for such activity. Nor has it been clarified what legal options are available with regard to the Hungarian immigration control authorities checking such data management and the accuracy of the data provided,” says Attila Imecs, manager of PwC’s Tax and Legal Services. “As far as we are aware, there will also be enterprises in Hungary that will be authorized to sell the EUR 250,000 government bonds, but as yet detailed information is not available.

Based on the feedback we have received, this investment option has stirred the interest of numerous investors and would attract many third-country nationals to Hungary, since the residence permit would allow its owner not only to enter Hungary, but also to travel to any country in the Schengen Area without a visa.

Currently Hungary is not among the favoured immigration destinations, with well-off third-country nationals until now preferring the possibilities offered by Great Britain or other countries in the European Economic Area, where the cost of obtaining a residence permit is significantly higher. However, the relatively low amount that needs to be invested to gain Hungarian residence and Hungary’s geographical location could enable it to compete with the possibilities offered by the similar systems of other countries and even give Hungary an edge.

“We trust that interest in Hungary will increase considerably and in a positive direction, but for that to happen processes need to be simplified, especially as far as the purchase of bonds is concerned. It is a long-term aim for the country to win the confidence of investors and to retain that confidence at least for the five-year investment period and even to increase it so that there is the possibility that foreign nationals taking up Hungarian residence for investment purposes will also create jobs,” says Imecs. It is important to consider such opportunities with the aim of encouraging foreigners to relocate their business activities to Hungary in connection with an apparently one-off investment. It is not a case essentially of wealthy or high-income individuals taking up Hungarian residence for the purpose of working here, so they are unlikely to threaten the labour markets of either Hungary or the EU. They will, however, spend some of their income in Hungary, which will increase tax revenues through consumption.

“The big question is to what extent the Hungarian government can make the conditions of obtaining residence attractive. The legislation currently in force and cumbersome procedures do not necessarily make it a tempting option. With favourable legislation, the residence permit for investment purposes would be a tool in the hands of the Hungarian government that could make Hungary an attractive investment destination to investors with an interest in international business development,” says the manager of PwC’s Tax and Legal Services.

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2015. All rights reserved. “PwC” rrefers to PricewaterhouseCoopers Auditing Ltd. and PricewaterhouseCoopers Hungary Ltd. which are member firms of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.